Originally created 10/15/00

Former sole provider sees most profit

It sounded like a good idea at the time.

Open up the retail natural gas market to competition, turn the old monopoly provider into a pipeline distribution company and let consumers revel in cheaper prices wrought by a new free-market system.

But, as most gas customers know, there hasn't been much cause for celebration.

In the two years since Georgia became the first state to completely deregulate its natural gas industry, bills for most consumers have risen substantially while gas consumption has remained the same or, in some cases, decreased.

The situation will be particularly painful this winter, now that wholesale natural gas prices have more than doubled on the commodity markets during the summer.

Complaints still flood the offices of the Georgia Public Service Commission, the state's utility regulator.

The agency's top elected official is now calling Georgia's deregulation experiment an "unmitigated disaster."

"Regardless of where gas prices go - up, down or sideways - residential consumers are going to be paying more than they would have paid under the old system," PSC Chairman Bob Durden said. "My beef with deregulation is that those who pushed it said it would bring lower prices and better service for residential customers and small businesses - the opposite has happened."

Mr. Durden and other state officials say it might be time to revisit Georgia's deregulation model, possibly amending the legislation that created it. Others say such a move would derail the experiment before it has a chance to work.

The fate of gas deregulation might be up in the air, but most consumers say at least one thing is known: The plan has failed to live up to its promises.

"It's almost criminal," said Augusta resident Jim Canupp Sr., who claims his natural gas costs have doubled in the past year.

Winners, losers

Jeff Humphreys, economist and forecaster for the University of Georgia's Selig Center for Economic Growth, predicted that consumer benefits would be minimal because Atlanta Gas Light Co., although a monopoly, was already an efficient operation and consumers would have to pay the price of the new middleman companies' marketing efforts.

He said deregulation should have never been pitched as a boon to residential gas users.

"I never would have opposed deregulation, because I support open markets," he said. "But I've always said small (natural gas) users would not gain much from it."

Ironically, the entity to reap the most benefit from natural gas deregulation is the former monopoly gas provider, Atlanta Gas Light Co.

The landmark deregulation legislation (which the company helped draft) not only allowed AGL to exit the risky commodity market but also let the company convert its transportation and distribution costs - which had previously been calculated on a per-volume, per-customer basis - into a flat fixed rate.

The law also provided AGL a mechanism to collect the guaranteed monthly income by charging the various natural gas marketers a fee on a per-customer basis. The marketers, in turn, simply pass the charge on to the state's 1.4 million gas consumers.

Under the old system, frugal AGL customers paid less in fixed costs because the charges were tied to gas consumption. Customers typically had big bills in the winter and small ones in the summer, and AGL had the risk of losing money on transportation and distribution costs in mild winters.

Now, AGL for the first time is entitled to collect every cent of its fixed costs, whether the customer uses 1 therm or 1 decatherm. The typical base charge of $20 to $25 is more than double what customers paid under deregulation.

"This is why some residential customers have monthly bills of $60 in the summertime," Mr. Durden said.

Gas deregulation also has benefited big business because the legislation eliminated the subsidies companies paid into the system to help offset the costs of providing service to residential consumers.

In all, about $50 million in charges have been shifted from large industrial users to residential and small-business customers. According to AGL figures, the largest customers paid more than 10 percent of the cost of the distribution system before deregulation. Now, they pay less than 1 percent.

Industrial-rate customers' gas costs have fallen 25 percent under deregulation, especially large consumers who buy gas marketers' excess capacity with the understanding that their service could be interrupted to provide gas to other consumers on peak winter days.

But Roy Bowen, president of GTMA, an association representing the state's textile, carpet and consumer products manufacturers, said residential and small-business customers are not being gouged to benefit industrial users.

"That's not the case at all," he said. "The market is working as it was intended to work."

PSC Commissioner Stan Wise said the subsidies should have been taken away gradually over time to help low-income consumers and those living on fixed incomes adjust. However, he said the state's deregulation model is essentially fair because "everyone pays closer to natural costs."

"The intangible benefit from this is that it does make Georgia a more attractive place for business to bring jobs, but that doesn't make John Q. Homeowner feel any better," he said. "And I don't blame him."

Politics at fault?

AGL has normalized its income, big business has saved on its gas bills and the new natural gas marketers have found new customers to tap. Has everyone gained something from deregulation except the consumer?

A key legislator who pushed the 1997 deregulation legislation said he wants to find out. He said he's ready to amend the law - provided he sees year-to-year comparisons showing the majority of Georgians have not seen cost savings.

"I've heard many anecdotes but I haven't seen hard data," said Sen. Sonny Perdue, R-Bonaire, who was chairman of the commission studying deregulation in the late 1990s. "If it's not working to benefit consumers, it's absolutely on the table again."

But modifying the system is politically tricky. Aside from the various special interests involved, there's the issue of "who was at fault."

A circle of denial has been in effect since the first hint of consumer outcry.

AGL said utility deregulation was inevitable and wanted to be active in developing a plan instead of having the federal government draw up a one-size-fits-all proposal. The legislators who approved the plan said they were merely acting on the advice of the experts. The PSC said it is only enforcing the law.

"I don't want to be critical of the people who drafted this because if I want a solution, I have to work with these guys," Mr. Durden said.

Early deregulation problems centered on consumer confusion. First was the rigmarole of choosing a new gas supplier from a crop of mostly unknown marketers pitching everything from $50 sign-up bonuses to variable-rate plans to three-year contracts.

Some of these companies exited the market as quickly as they arrived. Others held on but went bankrupt.

Then came the billing glitches. Some consumers went months without a statement, only to receive one huge bill. Others reported having their accounts repeatedly switched between the various gas marketers.

What problems?

A utility expert questions whether Georgia officials should be too quick to make wholesale changes based on political, instead of economic, rationale before the system fully develops.

After all, it's only been two years since consumers have had a choice and less than one year since they were forced to switch service from Atlanta Gas Light to one of the new gas marketers.

After all, it was nearly a decade before the typical long-distance customer yielded the benefits of telecommunications deregulation.

"Is it too early to make adjustments? No," said Ken Malloy, president of the Wisconsin-based Center for the Advancement of Energy Markets. "But let's hope the adjustments are not `Let's go back to the old system.' There could be some tremendous innovations that will take place."

Indeed, opening Georgia's market to competition has brought some innovations, such as a choice in variable- to fixed-rate deals.

For example, consumers who signed up for the fixed-rate plan offered last fall by gas marketer Shell Energy would still be paying 39 cents per therm of natural gas, a price well below what most suppliers now pay on the wholesale market thanks to this summer's jump in commodity prices.

Under the old system, AGL would have filed for a rate increase to pass on the higher costs. On the new playing field, competition keeps the rate increases as small as possible.

"Nobody would have predicted that natural gas prices would have set records this year," said Tim Sheehan, spokesman for Shell Energy. "Now all of a sudden, deregulation is not looking so bad."

Even those consumers who are paying more for gas under deregulation are trying to look on the bright side. They anticipate the payoff will come.

"I think it will have to get better, the market forces will make it better," said Augusta resident and restaurateur Carl Swanson. "It will find its level someplace."

Reach Damon Cline at (706) 823-3486 or at bized@augustachronicle.com.


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